THE BOUNDARY OF ADJUDICATION: THE ABSOLUTE LIMITATION ON GST DEMAND UNDER SECTION 75(7)

1. In the design of the CGST Act, 2017, the Show Cause Notice (SCN) issued in FORM GST DRC-01 serves as the structural foundation for any tax demand. It defines the parameters of the dispute, setting the outer limits of liability that a taxpayer is required to answer. A disturbing trend has emerged where tax authorities, while passing adjudication orders under Section 73 or Section 74 or Section 74A, exceed these boundaries. Tax, interest, or penalties are regularly inflated beyond the amounts originally proposed, or confirmed on entirely new grounds. Through a series of critical judgments across various High Courts, the judiciary has fiercely protected the sanctity of Section 75(7). The proper officer possesses zero jurisdiction to confirm a liability greater than, or on grounds different from, what was quantified in the SCN.

2. The statutory anchor of this principle is Section 75(7) of the CGST Act, which states that the amount of tax, interest, and penalty demanded in the order shall not be in excess of the amount specified in the notice, and no demand shall be confirmed on grounds other than those specified in the notice. This provision draws a firm legal line that restricts the proper officer's jurisdiction. Revenue authorities often attempt to bypass this limitation by invoking Section 75(9), which asserts that interest on short-paid or unpaid tax remains payable whether or not specified in the order determining the tax liability. However, as clarified by the courts, Section 75(9) only saves omissions in the final adjudication order-it does not excuse a failure to quantify interest in the initial show cause notice. If the interest up to the date of the SCN is known and not quantified, it cannot be suddenly sprung upon the taxpayer during adjudication.

3. The evolving jurisprudence highlights three primary ways tax authorities commit jurisdictional errors: unquantified interest, inflated monetary demands, and shifting legal grounds. In this regard, following judicial rulings are deciphered for better and clear understanding 360 degree dimension of Section 75(7);

4. In M/s Sanjay Construction Thru. Authorized Representative Shivendra Kumar Versus State Of U.P. Thru. Prin. Secy. Finance Deptt. Lko. And Another - 2026 (2) TMI 1206 - ALLAHABAD HIGH COURT, the authorities issued an adjudication order containing interest liabilities originating from the period 2020-21. Because this period was well within the department's knowledge when issuing the SCN on November 29, 2024, the court held that failing to quantify the interest up to the date of the SCN directly violated Section 75(7). The court flatly rejected the revenue's defense under Section 75(9), explaining that the provision applies only when interest is omitted from the final order, not when the department fails to notify the taxpayer of the quantified interest in the SCN itself. This built upon the court's earlier holding in M/s Vrinda Automation Versus State of Uttar Pradesh and another - 2025 (5) TMI 1435 - ALLAHABAD HIGH COURT, where an aggregate demand of 1,34,94,294 was quashed because it vastly exceeded the SCN proposal of 66,13,874.78 due to unnotified penalty and interest escalations.

5. The courts have consistently ruled that when an order-in-original demands a sum higher than the SCN, the order is structurally defective. In Mi Industries India Private Limited Versus Union Of India And 4 Others - 2025 (12) TMI 1775 - ALLAHABAD HIGH COURT, the proper officer proposed a demand of 1,71,79,347.92 in the SCN but escalated it to a staggering 9,42,21,714.94 in the final order. The High Court stepped in under Article 226, bypassed the appellate remedy due to an obvious jurisdictional error, and quashed the order.

6. Similarly, the Karnataka High Court in M/s. Prestige Nottinghill Investments Versus The Union of India, State of Karnataka, Commercial Tax Officer (Audit) -1. 8, Bengaluru. - 2025 (11) TMI 1915 - KARNATAKA HIGH COURT set aside an order where the department arbitrarily expanded a proposed demand of 2,49,63,816 into a confirmed demand of 6,93,77,821. The Madras High Court followed suit in Ms Tirumala Milk Products Private Limited Versus The State Tax Officer Group I, Chennai - 2026 (3) TMI 424 - MADRAS HIGH COURT, invalidating a final tax demand of 2,41,12,591 when the SCN had limited the proposal to 1,37,54,141. Furthermore, in Keshav Reddy Sweets Versus The Assistant Commissioner of State Tax, Telangana & 3 others - 2026 (4) TMI 1719 - TELANGANA HIGH COURT, the authority not only increased the demand from 1,54,866.11 to 5,53,983 but also added CGST and SGST liabilities when the SCN had only proposed an IGST liability. The Court labelled this an action 'in the teeth of Section 75(7)' and permitted rectification.

7. Section 75(7) also prohibits confirming a demand on grounds alternative to those specified in the SCN. In M/s. Duakem Pharma Pvt. Ltd. & Anr. Versus The Deputy Commissioner of Revenue, Strand Road, Chinabazar and Rajakatra Charge & Ors. - 2026 (1) TMI 1273 - CALCUTTA HIGH COURT, the SCN alleged a routine discrepancy regarding the reversal of Input Tax Credit (ITC) proportional to exempt supply. However, in the final adjudication order, the proper officer went off-script and ruled that the taxpayer's primary product did not qualify for a tax exemption at all, creating a new tax liability. The Calcutta High Court quashed the order, reinforcing that an adjudicating authority cannot change the grounds of a case mid-way through the process; a taxpayer cannot be expected to defend against a charge they were never officially confronted with.

8. A fundamental adage of administrative law, heavily reinforced by this statutory framework, is that the issuance of an SCN in FORM GST DRC-01 marks the absolute boundary of the Proper Officer's investigative authority. Once the SCN is generated and served, the Proper Officer is effectively seized of its jurisdiction, except to evaluate the objections, evidence, and explanations offered by the taxpayer against the specific proposals contained in that notice with due application of mind.

9. The moment an SCN is issued, the stage of inquiry, audit, and verification is legally closed. The Proper Officer changes roles from an investigator to an adjudicator. In this capacity, the officer has no inherent power to conduct fresh parallel inquiries into issues outside the SCN, cross-verify new sets of books or invoices to discover alternative tax liabilities, or re-interpret the taxpayer's business classification on a whim to maximize revenue collection. As seen in M/s. Duakem Pharma Pvt Ltd., when the Proper Officer abandoned the SCN's original claim regarding proportional ITC reversal and instead launched into a brand-new inquiry regarding product classification, the action was swiftly struck down. The officer cannot use the adjudication period to hunt for new discrepancies; their sole job is to determine whether the already proposed charges hold water.

10. When an adjudicating authority travels beyond the SCN to unearth unproposed liabilities, it is not an innocent procedural slip. It represents an absolute abuse of power. Because the taxpayer is legally blind to any unnotified charges, an officer who 'manufactures' new claims during adjudication directly violates the principles of natural justice. In practice, attempting to confirm a demand on unproposed grounds or inflated figures-as seen in Mi Industries where a 1.71 Crore proposal was weaponized into a 9.42 Crore final liability-frequently points to a colourable exercise of power and can be coupled with potential malafide intent to hit aggressive revenue targets at the expense of the law.

11. The SCN in FORM GST DRC-01 is a one-time binding contract of adjudication. Once issued, the Proper Officer's hands are tied to the contents of that document only. Any independent verification, fresh discovery, or inflation beyond the SCN during the decision-making phase constitutes a complete jurisdictional breakdown.

12 Any adjudication order passed in FORM GST DRC-07 that bypasses or undermines the strict mandates of Section 75(7) is structurally and fundamentally fragile. By engineering unnotified liabilities or exceeding the quantified figures laid out in the initial notice, tax authorities strip themselves of legal legitimacy. Such orders are profoundly vulnerable to judicial review and stand to be easily dismantled in a court of law on two unquestionable grounds:

i). Violation of the Principles of Natural Justice: Forcing a taxpayer to defend against unnotified claims or mathematical calculations denies them a fair hearing, turning the adjudication process into a one-sided ambush.

ii). Total Lack of Jurisdiction: An officer has no inherent authority to adjudicate issues or values omitted from the SCN; any attempt to do so means exercising a jurisdiction that the officer simply does not possess.

13. The baseline set by the judiciary across these landmark rulings [supra] serves as an uncompromising check on administrative overreach. If the proper officer fails to respect the very boundaries it drafts in its own notices, the resulting orders are legally untenable and predestined to be quashed under the watchful eye of the courts.

14. When tax authorities strictly adhere to statutory boundaries like Section 75(7) of the CGST Act, they are not just following a legal checklist-they are honouring the fundamental right of a citizen to a fair, predictable, and transparent process.

15. The relationship between the State and the taxpayer relies entirely on trust. When an officer issues a Show Cause Notice in FORM GST DRC-01, it represents a formal commitment. It tells the taxpayer exactly what they need to answer for. If the proper officer later breaks that promise during adjudication by inflating demands, inventing new charges, or shifting the legal goalposts, it destroys that trust and violates the principles of natural justice.

16. By vigorously enforcing the limits of adjudication, the High Courts are sending a clear message: Revenue collection cannot happen at the expense of the rule of law. True taxpayer facilitation begins with administrative discipline. When authorities respect the legal boundaries laid down by the legislature, they guarantee a fair playing field, protect businesses from arbitrary harassment, and uphold the dignity of the honest taxpayer.

17. Finally, what transpires from this judicial landscape is that the term 'Proper Officer' is a statutory mandate requiring authorities to act strictly within the governing principles of adjudication; any failure to do so completely sabotages the legitimacy of their own orders. When an officer ignores the strict boundaries of Section 75(7) by escalating financial demands, inventing unnotified liabilities, or launching into fresh post-SCN inquiries, they commit a fatal jurisdictional error and actively violate the principles of natural justice. Rather than securing revenue, this overreach exposes the final order to charges of arbitrary abuse of power, strips the department of legal credibility, and guarantees that the entire proceeding will be dismantled and quashed in a court of law.

'Upholding the statute is a golden receipt of respect to the taxpayers and a 'Royal Salute' to the authorities'.